Comcast turned in another solid fourth quarter last week but, despite having what chairman and CEO Brian Roberts said was perhaps its best year ever, stock in the nation’s largest cable operator dipped more than 3% on Feb. 1, as investors appeared more interested in concentrating on rising capital expenditures.
Comcast stock fell as low as $42.08 apiece (down 5% or $2.27 per share) on Feb. 1 — the day it announced fourth-quarter results — before closing at $42.92 (down 3.2% or $1.43 each).
Time Warner Inc., owner of the country’s second-largest cable operator, also saw its stock price dip by about 2% after reporting fourth-quarter results on Jan. 31. While the decline was less dramatic than with Comcast — Time Warner stock dropped 40 cents per share between Jan. 31 and Feb. 1, when it closed at $21.62 each — investors appeared to harp on Time Warner Cable’s 23,000 basic subscriber losses, mainly from former Adelphia Communications systems.
The biggest factor in Comcast’s share decline was attributed to a projected $1.1 billion increase in capital expenditures for 2007, to $5.7 billion from $4.6 billion in 2006. While the Philadelphia-based operator said that most of that spending increase will be success-based — tied to growth in revenue-generating units — investors apparently focused on the fact that rising capex will cause free cash flow to be flat for the year.
“What you’ve been witnessing in the stock price is a push-pull between the growth investors who like what they see and the value investors who don’t,” said Sanford Bernstein cable and satellite analyst Craig Moffett. “The value investors are applying a very simple test, which is, 'When I went to bed last night, I thought I had a stock that was delivering a 4.5% free cash-flow yield in 2007 with 30% free-cash-flow growth rate, and I woke up in the morning and had a stock that was delivering a 3% free-cash-flow yield in 2007 with a 0% free cash flow growth rate.’ No matter what, it’s hard to spin that as good news.”
The stock dip was reminiscent of Nov. 3, 2005, when Comcast said while reporting third-quarter results that capital spending for the full year would rise to more than $3.5 billion, above previous guidance of between $3.2 billion and $3.3 billion. Comcast stock dipped 5% ($1.44 per share) that day.
Aside from the higher capital spending projections, Comcast’s fourth-quarter results were generally in line with analysts’ expectations. But many were stunned by the massive growth in basic subscribers. Comcast added 111,000 basic customers in the period, its best basic-growth quarter ever.
“Certainly consensus wasn’t expecting 100,000 [basic] subscriber additions,” Moffett said. “The basic subscriber growth is a very strong performance and is the last remaining piece of the puzzle in Comcast’s triple play growth story.”
Comcast also issued guidance for the full year, projecting 2007 revenue and operating cash-flow growth of at least 12% and at least 14%, respectively. Comcast also projected it would add 2.6 million digital voice customers in 2007, up from the 1.5 million it added in 2007.
Net voice additions at 421,000 were slightly above most analysts’ expectations and high-speed Internet additions (487,000) and digital-cable additions (613,000) were in line with consensus estimates.
“2006 really was a watershed year for Comcast,” chairman and CEO Brian Roberts said on a conference call with analysts. “Simply put, it may have been our best year ever — outstanding execution across all business lines with strong momentum taking us into 2007.”
Moffett said that there was little to criticize on Comcast’s balance sheet, adding that the big surprises were the basic customer growth and a strong increase in advertising revenue — up 26% to $501 million in the fourth quarter.
“The advertising number in the fourth quarter was a huge number and there is unmistakable evidence that there was a huge share shift from broadcast TV to spot cable in the run-up to the November 2006 elections,” Moffett said.
But despite those gains, the quarter was far from the blowout that many investors have become used to, a factor that may have contributed to the decline in Comcast’s stock price.
“What’s changed is not that Comcast is any less successful,” Moffett said. “What’s changed is that investors are starting to expect it.”
That was evident at Time Warner, which saw its shares drop despite reporting an 8% rise in overall revenue and a 13% increase in adjusted operating income before depreciation and amortization (AOIBDA, a measure of cash flow). That growth was fueled mainly by its cable unit, which posted a 58% gain in revenue and a 46% rise in AOIBDA, mainly due to its joint acquisition with Comcast of Adelphia Communications in July.
But while Time Warner’s cable financial performance was strong, it fell short of expectations on a few key subscriber metrics.
Basic subscribers declined by 23,000 in the period, mainly due to customer losses at the recently acquired systems from Adelphia Communications. Basic customers were actually up by 29,000 subscribers at Time Warner Cable’s historic systems, but that was offset by a 52,000-subscriber decline at the former Adelphia properties. Most analysts had expected a 25,000 gain in basic subscribers for the company.
PHONE NUMBERS UP
Telephony additions, at 211,000 in the period were above third-quarter gains of 187,000 subscribers but only slightly ahead of analysts consensus estimates of 190,000 adds.
Banc of America Securities analyst Doug Shapiro summed up most analysts’ take on the cable unit’s performance. In a research note, he wrote that the phone subscriber additions were “nothing to write home about, but better than the disappointing [third quarter] results.”
Even Time Warner chairman and CEO Richard Parsons appeared to temper his enthusiasm for the company’s performance. On a conference call with analysts Jan. 31, Parsons said that 2006 was a “pretty good year.”
That, it turned out, wasn’t good enough for Wall Street.